The Editor, Sir:

The various media have been featuring the issue as to whether or not the unregistered institutions (Olint, Cash Plus and others) have a right to exist.

The point raised against those unregistered is that they exercise an unfair advantage over the registered or established institutions, in that the former do not have to observe the legal conditions (e.g. disclosure, submission of accounts, audit and other restrictions) under which the latter institutions have to operate, and as a result the unregistered bodies are able to offer, at least initially, abnormally high rates of return on investments, which cannot be matched by the established (and handicapped?) institutions.

Further, that the people who invest in these unregistered companies and who were described as 'stupid and greedy' by a leading bank will realise, to their loss, that such returns are unsustainable, except, of course, under conditions of money laundering. It is, therefore, necessary to consider as dispassionately as possible both sides of the coin: first, the position of the registered institution and second, the nature and appropriateness of the unregistered companies.

Store of value

In a normal situation money should be a store of value - not perfect but reasonably so. Factors such as inflation, interest rates should cancel out, leaving the value of a given sum of money, more or less stable. In other words, what one could buy with a given sum of money in 2000 should not be substantially different from what could be bought in 2007.

This should be the objective of monetary policy. This has not been the case in Jamaica over several decades. In 1969, our dollar was more than the U.S. dollar; today it takes over $70 (Jamaican) to buy one U.S. dollar.

The deleterious effect of this can be seen particularly in the case of pensioners. Take the case of a pensioner who received a lump sum of $400,000 in January 2003. Taking inflation at eight per cent per annum (less than actual) and income tax of 25 per cent, the financial position of the pensioner would diminish in five years from $400,000 to $263,633 in real terms. His income from his investment (assuming he deposited it at an established bank where the going rate is about eight per cent per annum on such a sum) would by the end of the five-year period be a paltry $15,818 or $1,318 a month (again in real terms) after taking the above-mentioned factors into account.

Other options

What are the other options open? Stocks, building societies, etc. There is hardly any difference, taking into account reliability, rate of return and such. The average citizens may not work this out mathematically, but they suffer the consequences nevertheless!

Hence, this is why Cash Plus, Olint, etc., are so popular. They fill a real need. People have become desperate and are, therefore, seeking short-term solutions whatever the risks! And all this is happening while the banks are making billions of dollars in profits every year.

Government has a duty to resolve the plight of the ordinary people by protecting, as far as it is reasonably possible, the value of their hard-earned savings. Pensioners who retired a decade or so ago are virtually starving today unless:

(a) They are being subsidised by their families/friends.

(b) They have other sources of income.

(c) Their pensions are constantly upgraded in line with inflation (hardly likely).

It is not overlooked that inflation has been reduced from double digits to single-digit levels. However, as already pointed out, an average inflation rate of eight per cent per annum over five years results in a loss of over 34 per cent in real terms. This is still unacceptable.

Our financial system reflects 19th-century thinking and attitudes - an undue reverence for the status quo and an inherent hostility towards change and the accommodation of newcomers.

The unregistered institution

These companies are not monolithic. There are differences among them. For instance, it is my understanding the Cash Plus operates in (or mostly in) local currency and guarantees a fixed return on investment. On the other hand, Olint operates only in foreign currency but offers no guaranteed return. In neither case has there been any public outcry against these companies.

However, the real problem lies as much in their success as in their failure, paradoxical as this may seem. If left alone, they are likely to spread and grow exponentially. What then would be the consequences regarding:

(a) Work attitude: Where would be the incentive to work, who would want to work at all?

(b) Savings/investment: Who would want to save or invest if money can be so easily earned?

(c) Governmental concerns: With so much money in people's pockets how would consumption be curbed? What would be the effect on inflation?

Bring unregistered companies in

The conclusion therefore is that it is imperative and urgent that the unregistered companies be brought within the framework of an expanded and reformed financial system, under new legislation if necessary, and thereby controlled albeit with imagination and understanding and in the interest of the country as a whole. This would mean that these companies would be subject to professional audit, taxation and submission of accounts, among other things.

Chaos would result if they are just left alone to expand and expand until they eventually displace the existing socio-economic infrastructure without providing a suitable replacement.

But before any action is taken, a commission should be appointed to inquire into the workings of our financial systems and to make recommendations. This should encompass not only the possible inclusion of the unregistered institutions but also a review of the policies and practices of the existing banks with a view to rendering them more amenable to the interests of the people they serve.

In the end, Jamaica should have a financial system that is open and sympathetic to changing circumstances that is sound, vibrant and fair to all concerned.

I am, etc.,

R.H. ALEXANDER

11 1/2 Temple Meads

Kingston 6